Forced NSEL merger has much larger ramifications

Over the next few days, the corporate affairs ministry has to take a call on whether it wants to insist on the merger of FTIL with its scam-hit subsidiary NSEL under Section 396 of the Companies Act—though the merger order was made a year ago, the case is in court and the government has sought one or two extensions already to finalise its stand. While FTIL will fight the case all the way to the Supreme Court, assuming the government enforces the merger, the case has implications that go well beyond whether FTIL founder Jignesh Shah is guilty in the NSEL scam. Shah, needless to say, proclaims his innocence and insists he was not aware of the daily goings-on in NSEL that led to a R5,600-crore payments problem—any apportioning of blame has to also include the Forwards Market Commission not sensing any trouble in the position limits being violated so blatantly, and the impact its sudden stopping of trading had on the process of squaring payments. All of that, including proving Shah’s guilt, however, is something the courts will decide.

Right now, the most important thing is to get the Rs 5,600 crore back, and the merger under Section 396 is related to that since the idea is to get FTIL to make good these payments—since NSEL does not recognise these as its liabilities, but as those of 24 defaulting parties on the exchange, it is not clear how the merger will help recover the funds.Section 396 has been used only twice so far, to merge PSUs several decades ago, but in that case the owners of the firms were the same. If a merger of two companies with very different shareholders is forced, even assuming the courts sentence Shah for fraud, this opens up the possibility of its use again—which means that, for instance, a loan taken by an SPV or any liability of a subsidiary, can be invoked against the parent company. While the government needs to seriously think about whether it wants to take such an extreme action—the principle of limited liability means a firm’s liability is limited to its reserves—that will trigger panic reactions in all of India Inc, it is worth keeping in mind the government’s immediate purpose is better served by concentrating on recovering dues from defaulters. NSEL has managed to get decrees worth Rs 1,200 crore from the courts already—this means it can sell these properties and square off dues—and injunctions on property worth another Rs 3,900 crore; some more effort on this front, and the urgency for the merger will also go away.